# effective interest rate

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## Effective Interest Rate

The annual rate at which an investment grows in value when interest is credited more often than once a year.

## Effective Interest Rate

The interest rate on a debt or debt security that takes into account the effects of compounding. For example, if one has a fixed-income investment such as certificate of deposit that pays 3% in interest each month, the effective interest rate is more than 3% because compounding the interest results in a (slightly) greater principal each month on which the interest rate is calculated. In this example, the effective interest rate is calculated thus:

Effective interest rate = (1 + .03/12)^12 - 1 = .0304 = 3.04%, where .03 is the simple interest rate and 12 is the number of times in a year interest is compounded. It is also known as the annual effective rate or the annual equivalent rate. See also: Stated annual interest rate, annual percentage yield.

## effective interest rate

the INTEREST RATE payable on the purchase price of a BOND. For example, a bond with a face value of £100 and a NOMINAL (COUPON) INTEREST RATE of 5% generates a nominal return of £5 per year. If, however, the bond can be purchased for £50 on the open market, then the effective interest rate now rises to 10%, representing a 10% return on the £50 invested. The lower the purchase price of a bond with a given nominal rate of interest, the higher its effective rate of interest will be, and vice-versa. There is thus an inverse relationship between the price paid for a bond and its effective rate of interest (sometimes called the interest YIELD).

## effective interest rate

The actual interest rate of a loan,regardless of the face interest rate or the rate quoted.See annual percentage rate.

References in classic literature ?
This also you cleared up in a very effective way, though I had already come to the same conclusions from my own observations.
I have usually proceeded on the principle that persons who possess sense enough to earn money have sense enough to know how to give it away, and that the mere making known of the facts regarding Tuskegee, and especially the facts regarding the work of the graduates, has been more effective than outright begging.
He was all she had at first imagined him to be: almost everything he had said seemed like a specimen from a mine, or the inscription on the door of a museum which might open on the treasures of past ages; and this trust in his mental wealth was all the deeper and more effective on her inclination because it was now obvious that his visits were made for her sake.
He will write a page or two, giving evidence of that accumulated power and attainment which, with a more strenuous temperament, might have sufficed for an effective volume.
These pills we have found to be very effective, and they save a lot of time.
The child had no playmates, so he did not know that boys often dig out the inside of a "pumpkin-jack," and in the space thus made put a lighted candle to render the face more startling; but he conceived an idea of his own that promised to be quite as effective.
It seemed to me that a bean shooter would have been as effective against the mighty monster as these pitiful weapons.
From beneath the half-raised shutters of the bungalow other bowmen did effective service in greater security, and after the first assault, Mugambi withdrew his entire force within the building.
The blood ran freely from the crude but effective surgery, and he lay and licked the wound and was depressed with apprehension of he knew not what terrible fate awaited him and was close at hand.
The man replied that if the Horse would receive a bit in his mouth and agree to carry him, he would contrive effective weapons against the Stag.
1) In diction, dialect and style it is obviously dependent upon Homer, and is therefore considerably later than the "Iliad" and "Odyssey": moreover, as we have seen, it is in revolt against the romantic school, already grown decadent, and while the digamma is still living, it is obviously growing weak, and is by no means uniformly effective.
In a single month after its formation it numbered 1,833 effective members and 30,565 corresponding members.

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